The Wheels of Commerce

Will Capitalism Survive Its Own Success?

November 29, 1998|CHARLES R. MORRIS | Charles R. Morris is the author of the forthcoming, "Money, Greed, and Risk: The Course of Financial Crises," to be published by Times Books in the spring

Cynics' eyebrows shoot skyward when a financial titan decides to bestow his Big Thoughts on the world, as George Soros does in his latest book, "The Crisis of Global Capitalism." Skeptical smiles broaden when he insists on opening with a disquisition on his "theory of reflexivity"--obviously, another wealthy egomaniac like Donald Trump striving for respectability.

If cynics stopped reading there, however, they would miss a very good book. Soros became famous in 1992 when he made $1 billion in a matter of weeks by single-handedly forcing a devaluation of the British pound. Last year, some East Asian governments assigned him primary blame for creating havoc in global currency markets and wrecking the Asian economic miracle. Through his philanthropic activities, he has also rendered important assistance to countries in Eastern Europe and, less successfully, to the countries of the former Soviet Union that are making the transition to free enterprise economies.

The Soros on display in "The Crisis of Global Capitalism" is obviously a very smart man, with a crisp writing style, considerable modesty and many useful things to say about global finance and the state of the world. Here and there, he gets a bit high-flown--with his eight-stage cycle of financial booms and busts and occasional digressions on Kant--but he balances the reach for profundity with a refreshing lack of dogmatism and considerable candor in describing his own missteps and ventures gone sour.

"Crisis" is actually two books in one. The first, called "Conceptual Framework," sets out Soros' philosophy of knowledge, finance and contemporary values, and though it is often sharp and interesting, most readers will skip to Part 2, where the master holds forth on the economic crisis in Asia and other developing countries. While his assessment of the current state of global finance is quite gloomy--he believes the world is heading toward a prolonged period of depression--he makes his points without shouting and offers a set of fairly modest, albeit politically complicated, reforms that he feels could avert a crisis.

In the book's more philosophical opening section, Soros mounts a sharp attack on the assumptions behind conventional economics and the theory of finance. Both fields have been taken over by mathematicians who implicitly assume that economies mirror the regularities of physical systems. Graduate students in economics spend many hours proving the existence of equilibrium points that never occur in the real world, an enterprise that recalls medieval theologians spinning out theories about angels and pinheads.

By his "theory of reflexivity," Soros means that economic outcomes are determined as much by perception as by reality and that economically irrational but very human behaviors like "herding"--the tendency of even the most sophisticated investors to follow the mob--account for the booms and busts that characterize most of economic history. Although he lays out his case clearly, it is not quite as original as he apparently believes. John Maynard Keynes long ago pointed to the "animal spirits of investors" as a key economic driving force, and among today's mainstream economists, MIT's Paul Krugman specializes in exposing the fatuities of academic economics.

Soros' dismal investment record over the last year or so actually lends a certain credibility to his analysis of current crises in the second half of the book: These are not the theories of an ivory-tower academic but the sober reflections of someone who's been through the wars. But at the same time, Soros is making the case that his speculations were not to blame for the 1997 East Asian currency crises, as the prime minister of Malaysia, Mahathir Mohamad, among others, has charged. Soros, in fact, was actually buying East Asian currencies when they started to collapse because he thought they would recover. The Indonesian currency, the rupiah, for example, had been pegged at a pre-crash value of about 2,400 to the dollar; Soros started buying when they fell to 8,000 and took huge losses when they continued their free fall all the way to 16,000.

Soros' publisher, PublicAffairs, has made a specialty of producing books very rapidly--it had "The Starr Report" in bookstores hardly more than a week after it was released--and one of the great virtues of "Crisis" is its magazine-like immediacy. Soros didn't deliver the final manuscript until September and so was able to include substantial selections from personal notes taken during August's crisis in Russia. As a native of Hungary, Soros knows as much about Eastern Europe and Russia as any other Western investor, and he charts the disintegration of the Russian government and the dithering of the West in considerable detail. As investors fled Russia, the government was forced to pay rates as high as 450% to induce foreigners to hold rubles.